WHY TRADE

INTERNATIONALLY?
Unit 5 International Business

Tesco and McDonalds

Oskar Zgodzinski
Contents
Explain why two businesses operate in contrasting international markets.............................................2
Introduction.......................................................................................................................................2
Tesco – Who are they and why they operate internationally..............................................................2
Reasons for trading internationally................................................................................................2
McDonald’s – Who are they and why they operate internationally...................................................4
Reasons for trading internationally................................................................................................4
Explain the types of finance available for international business...........................................................5
Letters of credit.................................................................................................................................5
Bank loans.........................................................................................................................................5
Prepayment by the importer...............................................................................................................5
Export credit......................................................................................................................................5
Grants................................................................................................................................................6
Explain the main features of globalisation that affect two contrasting businesses.................................6
Globalisation.....................................................................................................................................6
International mobility of labour.........................................................................................................6
International currencies.....................................................................................................................6
International business communications.............................................................................................7
International payment systems...........................................................................................................7
Explore the role of trading blocs on international trade.........................................................................7
NAFTA.............................................................................................................................................7
Mercosur............................................................................................................................................8
EU.....................................................................................................................................................8
Trading Blocs....................................................................................................................................8
Analyse the support that is available to contrasting businesses that operate internationally..................8
Analyse the barriers of operating internationally for two contrasting businesses..................................9
Evaluate the impact of globalisation on a business..............................................................................10
References...........................................................................................................................................11

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Explain why two businesses operate in contrasting international
markets.
Introduction

In this report I will evaluate the impact of globalisation on both Tesco and McDonald’s. I will
also cover the effects of diversification, reasons for trading internationally, support for
businesses trading internationally and more. The businesses I have chosen (Tesco and
McDonald’s) are 2 of the largest companies in their respective markets, retail and fast food.
Both businesses trade internationally and have very important operations therefore a lot of
information.
Tesco – Who are they and why they operate internationally

Tesco focus their efforts on general merchandise such as clothing (George), food, toys and
more. Their company have grown from building multiple multi-format stores and online
retailing. Their innovative business decisions have put them on top of UK’s retail store
market share, one of these is the “Clubcard” in which provides cheaper for their customers,
increasing brand loyalty. They have been competing with large UK brands since they first
emerged on the market as a competitor with companies like ASDA, Morrisons, Co-op and
more. Tesco only operate in 11 countries other than the UK, Poland, Turkey, France etc.
Reasons for trading internationally

Trading internationally is a stressful decision any big business, Tesco saw opportunity to
grow their business further by exploring options in different countries mainly Europe and
Asia, even though the UK held up 75% of their annual revenue in 2004 that means they’ve
grown their business by 25% because they expanded operations to Thailand, Poland, South
Korea and Japan alone. These additional revenues helped them acquire more acquisitions in
even more countries to expand into even more markets. For example, Tesco bought stores
into Ireland because they recognised that there was space for them to fill out and succeeded,
receiving roughly 21% of the Irish supermarket/grocery making it the market leader of that
entire country, market leadership in countries that do not have a large supermarket presence
in the market is one of the best reasons to trading internationally.
Trading internationally can help to discover additional revenue streams with companies that
are very big in their home country, Tesco used this to their advantage by partnering with
Samsung to sell their phones in their stores inside South Korea, creating the business
“Homeplus”. Tesco received over ¾ of the shares in the joint venture, increasing revenue
streams by 30% internationally. Another reason for trading internationally is diversification.
Diversification is the process of creating new or improving products or services to benefit the
company, Tesco have done this by creating self-checkout tills, shop as you go system and
even petrol stations. The Clubcard offering very low prices has been very popular in Asia and
Eastern Europe in the last 2 years, it has been recorded that 70% of the trading profits has
been in correlation to the use of and acceptance of the Clubcard. No other supermarket
franchise uses the same strategy of a loyalty card in Asia and eastern Europe because ASDA

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and Lidl (Tesco’s competitors) that have recently adapted to a loyalty card scheme are not
very popular in those regions. This is also a sign of technological dominance, Tesco use their
innovations to internationally present as a feared opponent because of their services.
Brand exploitation is a key game changer when it comes to trading internationally, an
example of this is Tesco Bank, operating in over 10 markets such as Asia and North America,
markets in which they’ve already established themselves in for years, this success of the
recent launch going into financial banking segment is a clear example of brand exploitation,
to achieve success with a risk such as banking is no easy task for any company that has no
experience in that niche. Tesco Bank started by joining the Royal Bank of Scotland buying all
of its shares and renaming it as a subsidiary of Tesco, this is a further example of brand
exploitation because the general public would think that the bank of Scotland would be more
popular as the brand face but it was the opposite, Tesco has more international presence and
therefore their brand is the face of the bank now.
Increasing presence internationally has a domino effect on every other operation that Tesco
has already developed, with further globalisation they increase their economy of scale,
meaning with more production, revenue and overall output the general cost of business
decreases giving Tesco the option to also decrease prices to competitively advance on their
competitors. Giving cheaper options when other businesses cannot offer those prices
increases sales in Tesco’s business helping them fuel further expansion internationally.
Economies of scale is a “hamster wheel” of globalisation. This also affects their fiscal
benefits, meaning what their social protection from tax breaks. In 2020, when Rishi Sunak
was the chancellor of exchequer meaning he controls the finances of the UK, he gave Tesco a
fiscal tax break of £700 million despite their surge of profits, helping Tesco financially to hire
more people and expand their business further internationally, but also another fiscal benefit
of trading internationally is for example, Tesco holds operations in Hungary witch has a
fiscal policy making corporation tax only 9% which is one of the lowest in Europe as a
whole, this means that Tesco doesn’t have to spend that much on tax compared to the UK
increasing revenue profits. This also further affects their preferential tax rate because in the
UK Tesco’s tax rate is 38% compared to Hungary’s 9% tax rate same as their corporation tax,
even if they don’t make as much revenue as their leading country, the UK, because their tax
is so low it comes out to a similar profit margin, which is a big benefit to trading
internationally for Tesco.

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McDonald’s – Who are they and why they operate internationally

McDonald’s is a leading fast food franchise that has revolutionised restaurants and how we
perceive fast food to this day. McDonald’s was founded in 1940 in California originally as a
hamburger stand. It is now the largest restaurant chain by revenue serving over 60 million
people with over 40,000 franchise stores in the world as of 2021. McDonald’s operates in 100
countries according to their website, holding over 40% of the market share. Their biggest
well-known competitors are KFC, Burger King, Subway and more. However, their biggest
competitor is Yum Brands a Chinese franchise that holds 30% of the market share.
Reasons for trading internationally

McDonald’s doesn’t directly operate each franchise it opens but it does manage it so there is
no backlash on them whether its PR related or financial, they let franchisees use their brand
after a thorough investigation whether its useful, profitable and helpful to them as a brand.
Trading internationally is meant for growth and they accomplish this by opening franchises in
China. China is McDonald’s second biggest country where it holds over 3000 restaurants,
this is important for them because Chinas fiscal policy benefits them through lower
corporation tax, it is 25% compared to 37% in the USA. Fiscal policies such as this one in
China benefit McDonalds with higher profit margins abroad, these policies also affect the
businesses preferential tax rates.
One of the most obvious reasons for trading internationally for McDonalds is the benefits of
growth both for their brand but also for their business, they don’t even have to setup their
business on their own in unknown territory they don’t have experienced in dealing with as in
cultural difference, law etc. Entrepreneurs from countries overseas ask McDonalds to open
one in their home country, generally because there’s none there and they see an opportunity
for investment, this therefore drives their growth and generates additional revenue streams.
For example, in 1990 a Canadian McDonalds president vouched to open a McDonalds in
Soviet Russia and succeeded. There was over 30,000 people waiting in line to try it,
generating approximately over $200,000 in revenue in one day.
Opening a McDonald’s in Russia did a lot for them including access to new markets and with
brand exploitation they were able to increase market share internationally, the event was
reported all over the world, and just snowballed into more sales in other countries. Safe to say
the shareholders were pretty happy after such events because share price increased by over
40% during that year.
Market leadership is of course an important factor for any business because it almost is the
definition of success and its smooth sailing after that, this is why McDonald’s have invested
their effort into implementing their services into Japan and became the market leader. They
also achieved this by diversifying their products to fit the culture there because statistically
their one of the lowest fast food consumption countries in the world, they made new products
exclusive to Japan such as the “Mega Tamago” which is their big breakfast burger and also
the “McPork” which is just a pork sausage. However, they also increased the quality of the
food and perception after it hit an all-time low, so a key strategy was to create a trusted space
online where all the food’s nutrition and ingredient information could be found. The

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packaging had a QR code added that linked to the information and social media was used to
link to the website.

Explain the types of finance available for international business.

Letters of credit

Letters of credit is a document used by mostly bankers to deter whether a credit is trustworthy
or more commonly used as a payment mechanism to provide an economic guarantee when
trading internationally to an exporter of goods. This letter is very useful and has rarely any
faults, this document always reassures the seller that they will receive payment no matter
what, after all that’s how businesses are ran, from the payments not the sales. However, often
a person can be almost tricked in terms of small writing that contains additional costs that
aren’t needed or correlate with the purchase, its just a trick to grab more money from the
opposite party while they can.
Bank loans

Often bank loans are provided to the general persons for example if they want a mortgage or
sum money for renovations etc. However, in this case it is used by businesses that don’t have
enough money to pay a supplier all at once, so they take out a loan to pay off periodically in
their home country. Bank loans often offer favourable interest rates for businesses making it
sometimes more affordable than other forms of finance available. On the other hand, to get a
bank loan for such activities comes at a cost with strict eligibility criteria that some
companies just don’t have the facilities or time to go over it.
Prepayment by the importer

Prepayment by the importer is in the name itself, it is where a company pays for products or
services in advance so the company sending out products can assure, they pay for the
materials and workers ahead of time often speeding up the manufacturing process. With this
process often the exporter can avoid credit risk so in case anything goes wrong there will be
no blowback on them. The least desirable choice for the buyer, however, is to require
payment in advance because doing so causes issues with cash flow.
Export credit

In order to help foreign buyers, finance their purchases of goods from domestic exporters,
governments may offer export credits, direct financing, guarantees, insurance, or interest rate
support. It's risky to conduct business by selling on credit. Your customer might refuse to pay
you for the products or services you deliver if you don't demand payment up front. By
safeguarding you against non-payment, a trade credit insurance policy assists in securing
your cash flow. Most policies include provisions for things like default, bankruptcy, unrest,
and political instability. On the other hand, export credit insurance policies might not be able

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to cover things like slow payments, late payments, customer disputes, and complaints about
the calibre of goods and services.
Grants

A grant is an honour bestowed by one entity (often a business, foundation, or government) on a

person or organisation in order to help them achieve a goal or reward good work. In most cases,
grants are basically gifts that don't need to be repaid. The fact that grants are never required to be
returned is one of the largest advantages. They are far more alluring than other forms of financial
assistance since they are like a grant from the government. This is since with financial instruments
like loans, you will always be required to repay your debts—often with additional interest. There are
always conditions associated with government funding. This means that only if the government agrees
that your mission is in line with their needs will you be given the grant. As a result, you are required
to follow this, which effectively controls your spending.

Explain the main features of globalisation that affect two contrasting

businesses.

Globalisation

Globalisation is when a company has operations outside of its country of origin or the process where a
business develops on an international scale or have international influence. Once globalisation
happens a lot of benefits can appear for the business such as access to new markets, often other
countries residents don’t tend to look outside their own country for products so when you come into
their company you become a viable option for them, however it means that you now have more
competitors to battle for market share and more with.

International mobility of labour

Mobility of labour includes the movement of workers to other countries where the business has or will
establish operations, it is mostly gauged on the impediments the employee has to the mobility. It helps
businesses such as Tesco evaluate where an employees specific set of skills is most useful and where
else it could help but this creates a problem of language witch links to business communications, an
additional cost of either a translator or language lessons would have to be provided.

International currencies

International currencies are a unique legal tender correlating to each different country to
differentiate and control their economic growth separately from other countries however
some regions such as most of the EU have one currency (the euro) they use together as they
see a benefit for trading internationally making it easier and more affordable. When
expanding globally currencies can deter a company because of the exchange rate or the cost
of converting currencies for example because Tesco is a UK based company, because of
Brexit now their cost of holding or moving operations outside the UK have become
substantially more expensive as the advantage of free international trade in the EU has been
revoked. However, when trading internationally the exchange rate can actually be what

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makes it affordable an example of this could be that operating in the UK and the moving to a
country like Poland where the exchange rate is 5x, can make a lot of the product slightly
cheaper. For a company like McDonalds this is especially beneficial as cost of pay-out for the
franchisee becomes in correlation cheaper abroad.
International business communications

When going through globalisation communicating with the different country’s

representatives/ regional managers that you have employed that only speak their native
language can be very hard, Tesco has a special team of translators both in-house speaking
several languages, and also translators ready to go whenever they need to speak face to face
with other branches. Luckily, these days when sending out an email a simple online translator
can be used that is almost as efficient as an actual translator and best part is its free.
McDonalds is almost at the opposite end of the spectrum where they almost don’t need a
translator because they just let people use their franchise from other branches that are already
in operation, but they do need some help in international business communications when the
globalisation hasn’t reached a new country and the process of research and development
starts again this is where a translator is needed.
International payment systems

There are different forms of payment that each country can prefer to the other, companies
such as PayPal and Stripe are useful services that businesses can use to receive payment in
other currencies, and it automatically is exchanged to your currency. However, business such
as Tesco and McDonald’s use more refined systems to process their payments and transfers
because most of them are too big to process through the services I have mentioned. Tesco
uses “MoneyGram” mostly because they have a partnership with them, and McDonald’s has
recently taken on “Adyen” as a global payment system. International payment systems are
very beneficial for globalisation because they have the fastest transaction rates for
international payments making it very safe for large amounts, although there is a risk of
account being locked out and funds frozen. Increasing anti-money laundering requirements
require payment systems to continuously monitor customer transactions. If the compliance
officer suspects an AML violation, there is a high risk that service access will be restricted.
However, their compliance departments are still more lenient than the banks.

Explore the role of trading blocs on international trade.

NAFTA

NAFTA is a trading bloc that includes Canada, Mexico and the USA. It stands for The North
American Free Trade Agreement, and it was made to eliminate all tariffs barriers to trade and
investment, it was a governmental aim to increase their economic growth by opening trade to
their neighbouring countries and allies. Recently they have renamed this trading bloc to
USMCA (The U.S. – Mexico – Canada Agreement) to make it easier for the general public to
understand. This agreement between the countries has seen much benefit for all the countries

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as it created over 5 million jobs and increased the national wage, however there was backlash
because almost 700,000 manufacturing jobs were lost both due to automation and the fact
that it was cheaper to move production to Mexico and ship it over to the US.
Mercosur

Mercosur is the South American trading bloc and its an abbreviation for “The southern common
market” from the Spanish and Portuguese language. It also has members from Argentina, Brazil,
Paraguay, and Uruguay. Like almost all trading blocs this one was created for the free
movement of goods, services and more. It helped these countries in stable and legitimate rule
over their economy, before this trading bloc each country’s economy was in free fall and this
helped them stabilise with indirect influence of the free movement of labour. However there
has been proof that the power sharing has increased costly side payments for things other
than trade such as prices of products and employees’ wages.
EU

EU is the most renowned trading bloc in the world because it has the largest population of
members, it stands for the European Union and was formed to enable EU enterprises such as
Tesco to compete both domestically and internationally by giving them access to inputs at the
lowest costs. Business transactions may be facilitated through trade agreements. For instance,
increasing the adoption of global standards by McDonald’s for industrial goods lowers
operating costs and fosters global commerce.
According to the agreement reached between the UK and the EU, any adjustments to food
costs after Brexit are expected to be "quite minor indeed." According to John Allan, it "hardly
would be felt in terms of the costs that customers are paying." The chairman of Tesco, John
Allen, also stated on the BBC's World at One programme that “supermarkets are finding it
difficult to source inventory before the busy holiday season due to changes in immigration
laws brought on by Brexit that are reducing the supply of lorry drivers”.
Trading Blocs
The establishment of trade blocs boosts foreign direct investment and benefits the economies
of the member countries. FDI lowers the costs of local product manufacturing for Tesco and
introduces new technologies to the economy. Trade blocs also facilitate the expansion of
markets and enable economies of scale. Due to the legalisation of mass production for
McDonald’s, the average cost of production is reduced. A disadvantage of trading blocs is the
movement of money to promote job creation in companies with the cheapest labour i.e
McDonald’s. This encourages outsourcing to other trading bloc countries and decreases the
number of jobs in companies where labour is more expensive i.e Tesco.

Analyse the support that is available to contrasting businesses that

operate internationally.
The UK Trade and Investment Agency is a company that aids and support to UK companies
looking to expand internationally as well as other CEOs of foreign companies looking to
establish a presence in the UK. Trades and investment are attempting to increase the supply
of inward investment with UK businesses and provide businesses with the ability to export
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their goods internationally allowing businesses to sell their goods in a global market. This
would be advantageous for businesses like Tesco and McDonald’s as they could gain another
market/country to trade in so they can increase their profits as they assist you in connecting to
different markets allowing your business to grow.
(UKEF) supports UK businesses and companies by providing insurance to exporters and a
guarantee to banks so that they can share risk. The exports you that it would repay you for a
portion of the money would aid multinational corporations like Tesco and McDonald’s if
they don't obtain their money from another global bank. For multinational corporations like
Apple and IKEA, which export to many different countries, this would be a huge advantage.
If international exporters had problems exporting, UK export finance would provide
insurance, reducing the risk of doing so and allowing the bank to cover the cost when
importing or exporting goods from another nation.
The BCC is an organisation that gives businesses of all shapes and sizes a voice to aid them,
so they don't have to spend as much time exporting their goods to other nations and
attempting to better the environment, they are trying to function in. Tesco and McDonald’s
are two examples. This support will help the businesses gain trust during the export stage so
if they are a part of this group, it will help your business get creditability to export your goods
to different countries, for example if they want to use cargo method to deliver your goods or
aircraft, they wouldn't need thorough background check to show proof of your business to see
if you're bringing illegal contraband so it wouldn't be time consuming. They can enter ships
and aeroplanes directly, which is advantageous for free trade. Currently, it costs between
6,000 and 10,000 dollars to pass through borders, so this would enable companies like Tesco
and McDonald’s to do so in a traditional manner without having to shell out such a sizable
sum.

Analyse the barriers of operating internationally for two contrasting

businesses.
Trade obstacles hurt Tesco since it exclusively sells white goods inside the EU, a trading bloc
that includes nations like Belgium and Denmark, among others. UK departed from EU due to
Brexit. The impact on white stuff was significant since they could have had trouble exporting
their goods to nations that were part of the EU, their trade partner. Tesco may only provide a
small selection of products; therefore, customers may have been forced to accept worse
quality and higher prices. Because wealthy nations frequently determine international trade
rules and laws, trade barriers are generally better for affluent nations.
Like Tesco, McDonalds may be harmed by trade restrictions. It will be influenced, among other
things, by rising costs, tariff-related price increases, and a decline in the supply of products and
services accessible to US consumers and companies. This might lead to decreased employment,
revenue, profits, and economic production. Another way that Brexit may have an influence on
McDonald's is that it may make it more difficult for the company to conduct business as the UK
prepares to leave the EU. This frequently focuses on reducing import and export duties and
encouraging investment in international commerce, as well as enabling trade across international
boundaries. In the event of conflicts with other countries, these agreements may be suspended, or, in
rare circumstances, embargoes may be imposed, which severely limits commerce. Since many of
McDonald's items might not be able to be sold abroad, this might have a significant effect on the
company. For instance, McDonald's does not have a good trade history with all of the EU members,

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including Denmark. Because of this, McDonald's does not trade with them the way it does with other
nations.

McDonald's is more impacted by currency rate fluctuations than Tesco. This is due to
McDonald's being a worldwide corporation and trading with several nations from various
trade blocs, which will increase the likelihood of fluctuating currencies. For McDonald's, the
fluctuation of the currency rate is crucial since they import raw materials and export finished
items. Depreciation will, however, help exporting businesses since it will lower the cost of
exports. However, because they import raw supplies, McDonald's may have to pay higher
import charges. For instance, Indonesia is one nation with whom McDonald's conducts
business. Despite selling their products for their normal price, McDonald's loses money
because of Indonesia's low exchange rate with the United States.
It is less probable that Tesco will encounter numerous legal limitations while conducting
business within the EU. There could be limitations on foreign enterprises establishing
themselves and doing business there if white stuff decides to grow outside of the EU. A
lengthier and more expensive setup procedure might result from this. White goods may
furthermore be required to pay the appropriate tax when selling within certain trading blocs.
White goods will be subject to new laws and regulations as a result of Brexit. For instance,
non-UK workers may no longer be hired, which may have an impact on workers who might
want to relocate to the UK for employment.

Evaluate the impact of globalisation on a business.

Many businesses are affected both favourably and unfavourably by globalization.

Globalization, however, has widened the market over the last five to ten years and given
businesses more avenues and opportunities to pursue. Tesco is the company I've chosen, and
over the past ten years, globalisation has been the primary driver of its growth and expansion.
The explosion of globalisation can be attributed to many different factors. Improvements in
finance, assistance, international competition, trade blocs, and obstacles encountered are a
few of these.
As more payment options are now accessible for customers to buy and sell products and
services, finance has had an influence on globalisation on businesses during the past ten
years. Cash was the only form of payment that companies could accept in the past due to
financial constraints. This therefore placed restrictions on companies since it meant that if
they wanted to purchase products from a foreign nation, they would have to wait for that
nation to receive payment before they could get their purchases. Additionally, because it took
so long to transfer goods and money, most firms would not be able to operate worldwide.
This meant that the market was constrained and that there weren't many opportunities for
businesses to develop and thrive. With enhanced financial connections, more readily
available payment options are now available and may be utilised swiftly and efficiently.
Transactions are now quicker if a company in the UK wanted to import items from China
since they can transfer money right away. Overall, the benefit of better financial management
for Tesco was that they could now offer their products promptly and effectively both in-
person and online.

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Businesses may now trade worldwide despite various countries having different currencies,
which is another effect of globalisation. Businesses may transfer funds via financing linkages
without worrying about currency exchange rates because everything will be done for you
through international payment systems. Transactions that include more than just banks are
referred to as international payments, cross-border payments, or global payments. They
provide connections between businesses, people, banks, and settlement organisations
operating in various nations using different currencies. Business choices have been altered by
globalisation since it now makes it possible for companies to sell or trade more successfully
and efficiently with different countries throughout the world. Because they can now operate
in more foreign countries without having to deal with exchange rates themselves, Tesco has
benefited from being able to obtain financing in various nations with various exchange rates.
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References

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